Why Wall Street Hates Open-Source

NEW YORK ( TheStreet) -- Wall Street has two reasons to hate open-source software. One makes sense, one makes none.

The reason that makes sense is that open-source software companies don't make much money.

When you offer code on a Web site, free for the taking, people tend to take it. Most won't pay you for using it. Some might even try to make money from it, and the costs of policing a license violation don't come back.

Most open-source benefits don't go to the vendor. Most go to the customer. You make money from open-source by using open-source to make something.

Take Eclipse, for example. The Eclipse Foundation organizes the code base, polices the license, and builds a community around its code. Its funding comes from members and sponsors, who are all free to extend the code base to make their own products.

IBM is the best-known and most notable Eclipse sponsor. It is not a charity. It uses an open-source development model to assure the stability of the code base, and this use assures both competition and compatibility.

IBM spent most of its first century tied to a proprietary model. Its mainframe business is still based on proprietary code. But it fought a 40-year antitrust struggle with federal regulators and found by the early 1990s that its size could not assure it control of the key PC code vbase, which went to Microsoft's ( MSFT) Windows.

It learned from that experience that it could make just as much money with services and hardware, solving problems, as it could selling and defending code. It shed much of the bureaucracy it had built to do that, a lot of PR and strategy and legal help. It rebuilt itself from the ground up, on open-source.

IBM is no longer America's biggest tech company, nor does it have the fattest profit margins. But it doesn't have the government asking it questions, and it remains profitable.

Now for the stupid reason Wall Streeters hate open-source.

To them, it smacks of socialism.

But open-source software actually keeps the government out of the software market.

There is no Moore's Law of Software. Software remains hand-made. As it grows more complex, it costs more to enhance and maintain.

This leads naturally to monopoly. In a competitive world, only one company can attain the scale to grow and protect a complex code base.

In the 21st century we don't have a really competitive software market, but a series of proprietary, monopolistic silos. Windows on the desktop: Apple's ( AAPL) iOS in the device market, Oracle in the enterprise.

But thanks to open-source, we don't send the government after this power. We send the market after it.

Open-source lets a lot of companies work together and build a code base that rivals any proprietary giant's. Linux competes with Windows in the server space because it's open-source. Apache is the dominant Web server because it's open-source. Small companies have a chance against big companies because they can build from an open-source base.

The only reason Apple doesn't have a monopoly in the smartphone market and Justice Department officers crawling through every office in Cupertino, Calif. is open-source. Microsoft might never have gotten the government out of its affairs but for open-source competition.

There are some on Wall Street who like monopolies. Monopolies make money regardless of the quality of their work. But monopolies also become bureaucratic and slow -- more like government than real businesses.

Open-source provides the market discipline to protect against these excesses. It's the best protection we have -- better, in fact, than government -- because it adapts more quickly.

When some on Wall Street think of open-source, they make the mistake of visualizing Richard Stallman, the leftist idealist who created Free and Open Source Software (FOSS) through the Gnu Project and who founded the Free Software Foundation to advocate the "fourth freedom" of free code -- the freedom to get others' enhancements to it.

Even today, Stallman looks like a hippie. He could have been a millionaire, but he rejected that idea long ago.

But Stallman will be the first to tell you that FOSS is not open-source. The wellspring of open-source thought is Eric Raymond's essay "The Cathedral and the Bazaar."

Palo Alto Networks' crucial earnings day events on Wednesday could determine share price direction in the immediate term. Ahead of the print, the stock still looks like a solid GARP play to be held over longer periods of time.